24. Trading order types: stop loss, trailing stop loss, LIMIT
Not only in trading cryptocurrencies, we distinguish two types of orders. Those with immediate execution and pending orders. We open an instant order at the current market price. Anyway, the name itself suggests it. On the other hand, a pending order allows us to activate it when its price reaches a level that we are satisfied with. In today’s lesson, we’ll look at a few bounties that fall into both of these groups.
We count it as pending orders. We distinguish two categories:
- Sell Limit – this order allows us to set a sales order, above the current price of digital assets we are interested in. So, for example, if the current USD COIN price is USD 1, we set the Sell Limit order to USD 3. The sale transaction is executed only when our asset reaches the price limit set by us. In this way, we minimize the level of risk.
- Buy limit – works the opposite of Sell Limit. We place a sell order below the current market price. For example, USD Coin has a current price of $1. We set the order at 0.5 USD, and it will be activated only when the price of our coin drops to the level we are interested in. Then the purchase transaction will be made by us.
Stop Loss and Trailling Stop Loss
Both orders allow us to better manage risk. They are an inseparable element of trading, and you will hear about them from every trader. So, what are they?
Stop Loss, which we literally translate as “stop loss”. It often saves our balance. It is used to close our order after reaching a loss at a predetermined level. What’s more, Stop Loss is not only protection, but also securing the profit we have already generated. Why lose, if thanks to the functions we can fully minimize losses?
Stop Loss allows us to manage risk and capital wisely. As an investor, surely you have frequently encountered the tendency to deepen existing losses or take profits too early. To prevent this, use this order. It serves e.g. down:
- Capital protection.
- It waits when the price reaches the level you specify and then closes the position.
- Automatically closes a losing position.
- Efficiently eliminates emotions that accompany you in the decision-making process.
- Thanks to it, you do not have to control the position all the time.
How to set Stop Loss? Do this by following a few key guidelines:
- By setting a fixed percentage from the entry level
- Based on the moving average (Moving Average).
- Use the time frame.
- Base on recent highs and lows.
- Consider your experience as well as the experience of longer-trading investors.
Trailing Stop Loss – is a feature that allows us to automate Stop Loss. It is a particularly useful tool when there is more volatility in the market or when you do not want/cannot monitor the chart of the asset you want to invest in yourself.
Trailing Stop Loss we can only join an already open position. It only works on a computer, so you won’t be able to use this feature on e.g. TradingView. This means that when you turn off your computer or the Internet, the tool stops working. We set the order on the chart.
Then, when the price will move and increase the profit from your position,Trailing Stop Loss will make the function Stop Loss will automatically track the price of the selected asset and move “forward” maximizing profit. For example, if you initially set your Stop Loss at 2% and the market is storming forward, then with a trailing stop loss the stop loss order will be shifted by a similar amount. Of course, you can disable this order at any time by simply deselecting this feature.
It is the immediate purchase or sale of a given digital asset at the best affordable market price. It is based on orders to imitate that we explained earlier. Market orders are placed on the exchanges you trade on. If you are interested in buying, for example, Bitcoin at the current market price, then you can use this function.
Orders in the market are not placed in the book of orders. They are executed instantly based on current market prices. Remember that when you place a marker order, you are taking a price set by someone else.
The Market function requires that the exchange have liquidity in the order book. By doing so, it satisfies the immediate demand for the asset. Unfortunately, since this type of order in a sense removes liquidity from the market, as a trader, you have to expect to pay higher fees after placing it.
If you care about immediate order execution and the price is of secondary importance to you, the market function will be the best option for you. This is a great choice if you are rushing to buy a given cryptocurrency.
This tool is also useful when you need to sell/buy as soon as possible or have a need to enter/exit a position immediately. Keep in mind, however, that in this case the fees are much higher than for the Limit order.
OCO – One Cancels the Other
Order one cancels, the other it is often called a special investment order. As the name suggests, using this function opens a new order but cancels the second one.
By selecting this option, you can place a limit or stop limit/market order and only one of them will be executed. Of course, the one that will provide us with a greater profit from the transaction and minimize the potential loss. There are two types in the stock market cancels, the other:
- OCO Limit – in this function, we have the option of placing a Limit and/or Stop Loss Limit order.
- OCO Market – here, for a change, we can use the following tools: Limit and Stop Loss.
Their order cancels the other, so we can put it on our exchange without any problems. Just log into your account and navigate to the spot/margin trading pairs you would like to trade. Press the Stop Loss function and select the function you are interested in: OCO Limit or OCO Market.
Of course, for us to use these tools, we need to have enough funds to carry out the orders we choose at all. The fields for entering data are important to us:
- Limit order price.
- The price, or basically the “stop price”, at which our Stop Limit order will be activated at the price we set.
- Stop Limit, which is the actual Stop Limit price that will be activated at the predetermined Stop Price.
Equally, buy order OCO or sell OCO, we can set higher/lower than the last trade price. However, in this case, we must consider a minimum of 0.5% of the price buffer of the asset we are interested in.
As in the case of a market order, we can remove the OCO at any time. All we have to do is press the “cancel” button and all our orders based on this tool will be stopped.
As you can see, there are many tools that automate our investments. Most of them are aimed at maximizing profits, but there are also those that make it easier for us to manage risk.